Uberization : is the party over ?

Today, nearly everyone wants to become the Uber of something. A catch-all word that covers many different meanings that sometimes have very little in common. No matter.

In general, the idea is to massively”take” a market by positioning oneself between the provider and its clients. Pre-empting customers and enslaving former providers. The whole with an “asset light” approach : as little investment as possible into physical assets, poorly scalable, contrary to digital assets that can scale with a very little marginal cost. In short, become a platform, the unavoidable entry point on a market for customers, by focusing on ability to operate at scale with a marginal cost close to zero.

As a matter of fact it’s a brokerage market with low margins, so volume matters.

The “Ubers of something ” have their adolescent crisis

However, over the last month we saw many startups not being able to survive despite of a promising start, in Europe and in the US. Frome Homejoy to Take Eats Easy, including Spoon Rocket, Washio, Save…. the cemetery is getting crowded.

The causes are not always the same : poor customer experience, too many physical assets, operations poorly manage… each had his own problems. However, there is a lesson to learn.

The model works as long as :

• Investors think that a leader can take a nearly monopolistic position. Don’t forget that the digital economy is an economy of monopolies, the only way to survive with low margins.

• Investors consider that this leader can be you.

The first condition works, at the very beginning, for nearly any business. Facing a new model, we can think that nearly every market is uberizable and that any new business can become the Uber of the sector. From a conceptual standpoint there’s no need to be a genius to replicate the model from an industry to another. What will matter is the ability to grow fast and keep operations and costs under control. Over the three last years, on unexplored markets, everyone had the right to play.

Investors bet on those who can dominate the market. Others leave.

The second condition is key to explain what happened these last months. The above mentioned companies did not fail at the start, they were adolescent businesses that already managed to raise signficant funds once or even twice.

The Take Eat Easy case is a good example. Investors refused to put more money because the company was still unable to be profitable because of poorly managed operations. That does not mean that the food tech is not a sustainable market. But if everyone starts from the same point, after a couple of years it’s easier to guess who can become THE monopolistic leader on the market. While Take Eat Easy was closing, Deliveroo raised $275 millions.

Yes, a leader can pre-empt the food tech market. No, after analyzing the performance of the many players, it’s not credible to think that Take Eat Easy can be this one. So investors stop funding take eat easy and focus on the one or two than can reach the critical size that will make them profitable.

The same story will happen in many industries. Many businesses got significant funding and now it’s possible to guess who can become THE leader. On markets that are monopolistic bynature, the next fund raising will be made by 2 or maybe 3 playsers by market. Not more;

For many startuppers, the Graal of uberization will soon become a nightmare. It’s very common to say about startups that many will start and very few will survive. Talking about Uber likes, even less will survive.

Ubers will have to become profitable fast

However, will the survivors win ?

Recurring Uber losses must make us remind of a couple of facts :

• Uberization requires a massive investment to cover the losses until the company has reached a critical size and is close to being a monopoly. Investors chose a company and bet a lot on it, saturate it with cash, until it kills the competition.

• One the startup is a monopoly, what masters is to control operations and costs. At this time, investors will be very demanding and have high expectations about profitability. When one bets hundreds of millions dollars on a company and the competition has disappeared, he wants a huge payback.

“Ubers” stuck between operational excellence and margin growth

At this time the leader has three options

• Improve operations. Sometimes it’s enough but sometimes margins are so narrow that that more is needed. It may be what Uber is facing today : the model is under control but the company struggles at becoming profitable.

• Put contractors (drivers, delivery people) under pressure. But at can’t be at the expense of customer experience which is the founding block of the model. It many not force contractors to leave either because the model is not profitable for the anymore. Even it it means joining their forces and uberizing the uber.

• Raise prices. A monopoly is never a bargain for its customers. But higher prices may cause less customers and more room for a low cost competitor.

That’s were the leaders of uberization are right now and we don’t know if the equation has a solution.

Nothing tells that Uber and its clone have won the war

Meanwhile, the “legacy” leaders have not (all) disappeared and have started their transformation over time. Slowly – they had to make two models coexist – but certainly. And in a profitable way because they did not play the hyper-growth game.

In two or three years we will see which Ubers made the right bet and which of them were only a spur that helped old businesses to transform.